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Makin' Money

Thoughts on the global market bust

Chris Farrell Aug 4, 2011

There’s more than a whiff of market panic in the air. Still, the underlying concerns about a slowing global economy are real.

The seemingly never-ending sovereign debt problems of Greece, Spain, Portugal, Italy and Ireland are eroding investor confidence. The emergency meetings and temporary patches put together by shell-shocked European Union leaders are starting to backfire. The favored tactic of “kicking the problem down the road” is working. The chatter is all about “Lehman 2.”

The bitter, needless debt-limit crisis in Washington alienated investors. The federal government’s fiscal flexibility is stymied by political gridlock and state and local government’s are cutting back. Yet the economy managed to eke out a mere 0.8% annual rate of growth in the first half of the year. Manufacturing is slow (previously a bright spot) and consumers are once again battening down the hatches, saving more and consuming less.

The gap between a growth recession and an outright recession is remarkably thin. I would expect the Federal Reserve, which took a quiet back seat during the debt-limit fight, will start taking action to shore up the economy.

With interest rates so low and heading lower (hard to believe) the Fed will probably turn to unorthodox monetary techniques.

How should people go about protecting themselves? I wouldn’t join in the panic. It’s a simple point but it bears repeating.

Fact is, many people saving for their retirement in a 401(k) and 403(b) have gotten far more conservative with their investments over the past 5 turbulent years. In this sense your portfolio may be fairly well structured already.

The time-honored tactic of diversification – mentioned in the Talmud and praised by Shakespeare – remains one of the more powerful ways to protect your finances from the downside. I would emphasize that you’ll pick a certain amount of additional safety if you’re diversified into high quality investments, everything from FDIC insured savings accounts to blue chip dividend paying stocks. The good news is that America’s major multinational corporations have never been so flush with cash, and the quarterly earnings reports have been good. I expect the opportunity to snap up good companies at a discount will lure investors back into the market.

Longer term, if your still find yourself nervous even after the financial scares of recent years, I would opportunistically hike the amount of cash in your portfolio. Sure, you’ll get a zero to less-than-zero return, but your money will be safe. In other words, sell down to the sleeping point. Not tomorrow. All you’ll do is lock in losses. But over a long period of time.

I’ve always liked this story about J.P. Morgan, the great 19th century financier. The tale goes that a man was in a panic after putting all his money into the stock market. He wanted to be rich, but if the stock market crashed he was financially ruined. He couldn’t sleep. One day, seeing the imposing figure of Morgan on a street, he summoned up his courage, and asked, “Mr. Morgan, I’ve investing all my money in the stock market and I can’t sleep. I’m a wreck. What should I do?” Morgan replied, “Sell down to the sleeping point.”

Again, my feeling is that after the housing bust, the credit crunch, the Great Contraction, the anemic recovery, Europe’s sovereign debt issues, and the risk of default on U.S government debt that most investors are pretty well positioned to weather the financial storm.

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